Jimmy Gentry and Gary Trennepohl present "Digging Deeper: Goodwill and Pro Forma" during Reynolds Business Journalism Week 2013. Reynolds Business Journalism Week is an all-expenses-paid seminar for journalists looking to enhance their business coverage, and professors looking to enhance or create business journalism courses. For more information about business journalism training, please visit businessjournalism.org.

1. Digging Deeper
Into Key Areas
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Jan. 3 , 2013
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2. Donald W. Reynolds National Center
for Business Journalism
at Arizona State University
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3. n James K. Gentry, Ph.D.
n Clyde M. Reed Teaching Professor
n School of Journalism and Mass Communications
n University of Kansas
n jgentry@ku.edu
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4. n Gary Trennepohl, Ph.D.
n ONEOK Chair and President’s Council Professor of Finance
n Oklahoma State University
n Trustee, Oklahoma Teachers Retirement System
n Member, OSU Foundation Investment Committee
n gary.trennepohl@okstate.edu
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5. Topics
n Goodwill, impairment
n Pro forma
n Bank financials
n Comparing companies: A Changing
Industry
n The concepts and your companies
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6. Goodwill, Impairment
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7. Goodwill
n Difference between what a firm pays to buy
another company and the book value (total
assets minus total liabilities) of that company.
n Has been written off over time, typically 40
years
n No longer amortize
n Other intangible assets will continue to be
amortized over useful lives.
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8. Impairment
n Instead of writing off over time, now use
“impairment testing”
n The impairment is expensed on the
income statement.
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9. Examples
n Crocs
n McClatchy
n Gannett
n New York Times
n HP
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10. Pro Forma
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11. Pro Forma Results
n Critics: Selectively defined earnings
n Expenses against earnings are not
standardized across an industry.
n SEC’s Regulation G (1/03) states that
non-GAAP numbers used in an
earnings release must be accompanied
by, and reconciled with, the “most
directly comparable GAAP number.”
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12. Pro Forma Results
n Recommendation: GAAP results should
precede pro forma results in earnings
releases.
n Headlines should show GAAP earnings.
n Many firms say pro forma has value.
n Common form: EBITDA. Also, OIBDA.
n “As a matter of form”
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13. Examples
n Dow
n Sprint
n HP
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14. Bank Financial Statements
1. The business of a bank
2. The balance sheet
3. The income statement
4. Some key financial ratios
5. Sources of bank data

15. The Business of a Bank
n Banks are a “financial intermediary,”
taking in money from “savers” and
loaning it out to “investors” - they buy
and sell money.
n For most banks, the majority of their
earnings come from interest income on
loans, and interest earned on securities.
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16. The Business of a Bank
n Banks also earn fee income for
services.
n Banks’ two main risks are:
n Interest-rate risk
n “credit risk”
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17. The Income Statement
Net interest Income
- Provision for loan losses
= Net Income after PLL
+/- Net non-interest income
= Net Income Before Taxes
- Taxes (many small banks are S corps)
= Net Income
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18. The Bank Balance Sheet
Assets = Liabilities + Capital
n Cash + n Deposits
Primary Reserve Fed Funds loaned
n
n Demand Deposits
n Securities n Savings Deposits
Secondary Res. n U.S. Governments n Now/Money Market Accts.
n Loans n CDs, Time Deposits
n Real Estate n Non-deposit Borrowings
n Commercial n Fed Funds purchased
n Consumer n Repo agreements
n Premises- Fixed n Long term debt
Asset n Equity Capital
n Misc. Assets
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19. Three Key Ratios
n Return on Assets = Net Income/(Avg. Total Assets)
n Typically runs around 1.0% to 1.5%
n Averages 4 quarters of total assets for the
denominator to smooth effect of asset swings
n Return on Equity = (Net Income)/(Equity capital)
n Will be different for publicly traded banks versus
private banks
n Capitalization Ratio = Equity/(Total Avg. Assets)
n Tier 1 Capital should be ≥10%
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20. The Texas Ratio
n Texas Ratio = (non-performing loans+OREO)
Equity + Loan loss Reserves
n Think of it as the ratio of troubled loans to “capital”
n OREO is Other Real Estate Owned
n Early-warning system to measure a bank’s potential for
failure.
n Banks tend to fail as TR approaches 100% (troubled bank)
n Don’t get a mortgage loan from a troubled bank.
n Data to calculate at http://www2.fdic.gov/sdi/main.asp. Use
“non-performing assets and bank real estate owned/equity
and loss reserves”
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21. Key Issues for Banks in 2013
n True form and impact of Dodd/Frank Bill
n CFPB begins life January 2013, and most rules still being
written.
n CFPB answers only to Fed.
n Banks are either OCC; Fed or State/FDIC regulated. How
will these regulators interact with CFPB?
n “TAG” =Transaction Account Guaranty expires in
2012.
n FDIC-insurance limits revert to $250,000 maximum.
n Will consumers withdraw funds from local banks now?
n Basel III - More new and complicated rules for calculating
“risk-based” capital
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22. Sources of Banking Data
n The Uniform Bank Performance Report
(UBPR) is provided by federal
regulators so analysts can compare
bank performance against peer groups.
n Web link:
n www.ffiec.gov
n Another source for large banks is:
n www.BankRegData.com
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23. Doing Comparisons
n Common-size analysis is an excellent
tool for comparing companies,
regardless of size.
n Companies in the same industry might
have similar or widely differing
statements. Common size brings out
those similarities and differences.
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24. Comparing Companies:
A Changing Industry
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25. The “Traditional” Companies
n CVS Caremark
n Walgreen
n Rite Aid
n They’ve been evolving.
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26. Model Is Changing
n Business models are changing
everywhere.
n Pharmacies have been quietly changing
for the past several years. Now, a
somewhat new entrant poses a big
threat.
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27. A “Disruptive Technology”?
n Express Scripts
n How will it change, and how will its
model change the business?
n Is this an example of a “disruptive
technology” in the Clayton Christensen
sense?
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28. The Concepts and
Your Companies
n What issues do you want to discuss?
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